Income Taxes

12 Months Ended

Oct. 01, 2021

. INCOME TAXES

Income before income taxes consists of the following components (in millions):


	Fiscal Years Ended
	October 1, 2021		October 2, 2020		September 27, 2019
United States	$	804.7	$	435.9	$	427.2
Foreign	794.0		455.8		533.8
Income before income taxes	$	1,598.7	$	891.7	$	961.0

The provision for income taxes consists of the following components (in millions):


	Fiscal Years Ended
	October 1, 2021		October 2, 2020		September 27, 2019
Current tax expense (benefit):
Federal	$	87.5	$	44.4	$	85.3
State	—		—		(0.1)
Foreign	70.7		49.5		23.5
	158.2		93.9		108.7
Deferred tax expense (benefit):
Federal	(45.8)		(6.8)		(0.4)
State	(0.1)		—		—
Foreign	(11.9)		(10.2)		(0.9)
	(57.8)		(17.0)		(1.3)

Provision for income taxes	$	100.4	$	76.9	$	107.4

The actual income tax expense is different than that which would have been computed by applying the federal statutory tax rate to income before income taxes. A reconciliation of income tax expense as computed at the United States federal statutory income tax rate to the provision for income tax expense is as follows (in millions):


	Fiscal Years Ended
	October 1, 2021		October 2, 2020		September 27, 2019
Tax expense at United States statutory rate	$	335.7	$	187.3	$	201.8
Foreign tax rate difference	(155.2)		(86.6)		(115.3)
Tax on deemed repatriation	—		0.2		8.1
Effect of stock compensation	(13.5)		(10.3)		(1.6)
Research and development credits	(27.0)		(23.0)		(25.7)
Change in tax reserve	(51.5)		9.6		18.4
Global Intangible Low-Taxed Income	69.0		35.9		54.3
Foreign Derived Intangible Income	(79.7)		(41.2)		(41.5)
Other, net	22.6		5.0		9.0
Provision for income taxes	$	100.4	$	76.9	$	107.4

The Company operates in foreign jurisdictions with income tax rates lower than the United States tax rate of 21.0% for the fiscal years ended October 1, 2021, and October 2, 2020. The Company’s tax benefits related to foreign earnings taxed at a rate less than the United States federal rate were $155.2 million, $86.6 million, and $115.3 million for the fiscal years ended October 1, 2021, October 2, 2020, and September 27, 2019, respectively.

The Company’s federal income tax returns for fiscal 2018 and fiscal 2019 are currently under Internal Revenue Service (“IRS”) examination. During fiscal 2021, the Company concluded an IRS examination of its federal income tax returns for fiscal 2015 and 2016. With the conclusion of the audit, the Company decreased the reserve for uncertain tax positions, including accrued interest and penalties, which resulted in the recognition of an income tax benefit of $34.8 million.

On October 2, 2010, the Company expanded its presence in Asia by launching operations in Singapore. The Company operates under a tax holiday in Singapore, which is effective through September 30, 2030. The current tax holiday is conditioned upon the Company’s compliance with certain employment and investment thresholds in Singapore. The impact of the tax holiday decreased Singapore’s taxes by $99.5 million, $63.1 million, and $32.8 million for the fiscal years ended October 1, 2021, October 2, 2020, and September 27, 2019, respectively, which resulted in tax benefits of $0.60, $0.37, and $0.19 of diluted earnings per share, respectively. These tax benefits were partially offset by an increase in tax expense on GILTI.

Deferred income tax assets and liabilities consist of the tax effects of temporary differences related to the following (in millions):


	Fiscal Years Ended
	October 1, 2021		October 2, 2020
Deferred tax assets:
Inventory	$	15.8	$	12.1
Accrued compensation and benefits	12.7		10.1
Product returns, allowances, and warranty	0.9		0.4
Share-based and other deferred compensation	31.8		25.9
Net operating loss carry forwards	7.1		7.4
Non-United States tax credits	17.0		16.5
State tax credits	126.9		115.5
Operating leases	45.4		43.4
Prepayments	42.1		—
Property, plant, and equipment	35.8		24.3
Other, net	15.0		5.9
Deferred tax assets	350.5		261.5
Less valuation allowance	(150.0)		(137.4)
Net deferred tax assets	200.5		124.1
Deferred tax liabilities:
Property, plant, and equipment	(38.6)		(26.4)
Intangible assets	(5.3)		(7.6)
Operating leases	(40.4)		(41.5)
Other, net	(15.6)		(7.5)
Net deferred tax liabilities	(99.9)		(83.0)
Total net deferred tax assets	$	100.6	$	41.1

The deferred tax assets and liabilities based on tax jurisdictions are presented on our Consolidated Balance Sheets as follows:


	As of
	October 1, 2021		October 2, 2020
Deferred tax assets	$	119.5	$	55.3
Deferred tax liabilities	(18.9)		(14.2)
Net deferred tax asset	$	100.6	$	41.1

In accordance with GAAP, management has determined that it is more likely than not that a portion of the Company's historic and current year income tax benefits will not be realized. As of October 1, 2021, the Company has a valuation allowance of $150.0 million. This valuation allowance is comprised of $126.9 million related to United States state tax credits, $3.3 million related to United States state net operating loss carry forwards, and $19.8 million related to foreign deferred tax assets. The state tax credits relate primarily to California research tax credits that can be carried forward indefinitely, for which the Company has provided a full valuation allowance. The Company does not anticipate sufficient taxable income or tax liability to utilize these state and foreign credits. If these benefits are recognized in a future period, the valuation allowance on deferred tax assets will be reversed and up to a $150.0 million income tax benefit may be recognized. The Company will need to generate $351.7 million of future United States federal taxable income to utilize its United States deferred tax assets, excluding state deferred tax assets with a full valuation allowance, as of October 1, 2021. The Company believes that future reversals of taxable temporary differences, and its forecast of continued earnings in its domestic and foreign jurisdictions, support its decision to not record a valuation allowance on other deferred tax assets. The Company will continue to assess its valuation allowance in future periods. The net valuation allowance increased by $12.6 million and $8.3 million in fiscal 2021 and fiscal 2020, respectively, primarily related to increases for foreign and state net operating loss and tax credit carryovers.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in millions):


	Unrecognized tax benefits
Balance at October 2, 2020	$	117.6
Decreases based on positions related to prior years	(28.6)
Increases based on positions related to current year	5.4
Decreases relating to settlements with taxing authorities	(13.6)
Decreases relating to lapses of applicable statutes of limitations	(25.5)
Balance at October 1, 2021	$	55.3

Of the total unrecognized tax benefits at October 1, 2021, $35.9 million would impact the effective tax rate, if recognized. The remaining unrecognized tax benefits would not impact the effective tax rate, if recognized, due to the Company’s valuation allowance and certain positions that were required to be capitalized.

The Company anticipates reversals within the next 12 months related to items such as the lapse of the statute of limitations, audit closures, and other items that occur in the normal course of business. Due to open examinations, an estimate of anticipated reversals within the next 12 months cannot be made. During fiscal 2021, the Company recognized an $11.6 million benefit for interest or penalties related to unrecognized tax benefits. During fiscal 2020 and 2019, the Company recognized $4.6 million and $6.0 million, respectively, of interest or penalties related to unrecognized tax benefits. Accrued interest and penalties of $4.5 million and $16.1 million related to uncertain tax positions have been included in long-term tax liabilities within the consolidated balance sheet as of October 1, 2021, and October 2, 2020, respectively.

The Company’s major tax jurisdictions as of October 1, 2021, are the United States, California, Canada, Mexico, Japan, and Singapore. For the United States, the Company has open tax years dating back to fiscal 2018. For California, the Company has open tax years dating back to fiscal 1999 due to the carry forward of tax attributes. For Canada, the Company has open tax years dating back to fiscal 2014. For Mexico, the Company has open tax years back to fiscal 2015. For Japan, the Company has open tax years back to fiscal 2014. For Singapore, the Company has open tax years dating back to fiscal 2015. The Company is subject to audit examinations by the respective taxing authorities on a periodic basis, of which the results could impact its financial position, results of operations, or cash flows.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

+ References + Details